This post is directly in response to a comment I received on my blog just yesterday.
Nice site!
I am for the flat tax, sales tax based is fine with me.
The idea of a rebate check bothers me, that seems to beg for trouble. Why not be able to exempt 'necessary items' instead?
or
If a poor person must be exempted (which is not a flat tax), issue them a special credit like card.
This card could allow a reduced or zero tax rate as deemed fit.
The totals spent on such a card could be limited to their income to protect from abuse.
Sat Dec 02, 09:40:16 PM EST
This put me in a mood to write, and gave me a distraction from cleaning my room!
This post was from anonymous... So I do not have anyone directly to address. I will instead address this to all 13 of my readers!
The prebate is an essential part of the FairTax, believe it or not. The FT is not just about making a national sales tax... it is about getting the government out of our back pockets. It is about making the citizens of this country fiscally free once again.
Under the current system, the government MUST know every dollar you make in order to effectively collect its taxes. It must also take a record of a good amount of the money you spend, so you can get your appropriate tax breaks. This is a flagrant violation of our privacy as individuals.
The FT, however, gets rid of any government digging into your own personal financial affairs. The government no longer needs to know how much money you make, what your income is, what charities you donated to, which investment funds you have put your child's future college tuition into... Your money is your money. You spend it where you wish, and the government never needs to know in order to collect its funds.
It only needs the sales numbers from each business that is registered as a business under the federal government. Registering as a business isn't even required by law. You only register as a business if you want to get the business to business tax-free purchases if the item is for future resale. This measure prevents a VAT tax situation.
Now, on to the concept of tax-exempt "necessary items." First, I have seen first-hand in Florida how a sales tax with "necessary items" tax exempt breeds complications and loop holes. Every business in the country will be finding one way or another to make its newest product a "necessary item," so that it too can be tax free. This will breed a whole new type of tax-lawyer who will be even worse than the tax-lawyers we currently have confusing our system to no end.
Also, it is a fact that those with more disposable income spend a higher percentage of the income they spend to live on tax-exempt "necessary items." If that sentence didn't make any sense to you, here is an example:
A millionaire makes dinner and a man at poverty level makes dinner. The poor man does not have time to make himself dinner because he needs to work, so he stops at McDonald's and buys two Double Cheeseburgers, neither of those burgers are tax free. The millionaire has his chef buy all fresh produce and meats and items from scratch to make his meal. He does not need to take the time to prepare a meal, and can work while his cook makes the meal. He can eat it just as if it were a fast food meal. That meal was tax free. They both spend money to survive, one spends more, but the one who spends more gets the food tax free more often than the one who spends less.
In other words, making specific items tax-free breeds corruption and complication in the tax code, and it does not favor the poor, who it is aimed at helping in the first place!
About the "credit card" for the poor that is limited to their income level, the government would need to know who is poor and who is not to hand this out. The FT has no system of reporting income because income level does not apply to taxes any longer.
The prebate creates an auto-adjusting system to ensure that those who spend at poverty level pay an EFFECTIVE tax rate of 0%. Meaning, the net taxes that are collected from the retail purchases that individual makes is zero. If a man at poverty level spends $10000 retail ($9800 is poverty level for a single person, so I am rounding up) in one year, $2300 of those purchases will be sent in to the government as tax dollars from the businesses he chose to frequent. He will, however, receive a check from the government on the first of every month in the amount of $2300/12=$192... Thus, the amount of taxes the government takes in minus the tax revenue it gives out in prebates is zero dollars.
An individual who spends $50000 retail in one year will have $11500 sent in to the government as tax dollars. He will also be receiving the same exact check for the amount of $192. So, his NET taxes collected as a result of his purchases is $9200. His effective tax rate is therefore 9200/50000= 18.4%
Finally, woman who spends $2 million in one year will have $460000 sent in as taxes. She will receive the same check of $192 monthly, and her net taxes collected will be $457700. This will be an effective tax rate of 22.885%
This system does not need any sort of subject panel deciding who gets what money. The system automatically creates a higher tax rate for the person who decides to spend money above the poverty level.
I want to also address an issue I noticed in the comment:
...If a poor person must be exempted (which is not a flat tax)...
The FairTax is not a flat tax. The idea is that an individual chooses the rate at which he/she is taxed by how much he/she decides to spend at the retail level. A flat tax says that every person will pay the same percentage of his/her income. This is not true of the FairTax.
One, under the FairTax, no one actually pays taxes, the businesses send the money in instead.
Two, a flat tax is not generally accepted by the American people and is viewed as regressive because it forces the poor to be taxed on what they need to survive, and some may not be able to afford to survive because of the oppressive tax burden. The compassionate American public views this in a negative light and wishes to raise the tax burden on those who can survive in order to lower the burden on those who cannot.
Three, the FairTax is a "voluntary" tax from the viewpoint of the consumer, that is you and me. We do not have to have a single dollar of what we earn sent in as tax revenue if we do not make any of our purchases at retail stores that make enough money to be considered business by the government.
Please, do not get the two concepts confused... They are very different.
I hope this clears up some issues out there.
Adios amigos!